Alabama power response to Katrina: managing a severe service supply chain disruption.

Skipper, Joseph B. ; Hanna, Joe B. ; Gibson, Brian J. 等

CASE DESCRIPTION

This case is designed to provide students with a business case based practical example of how an unexpected event can impact a business operation. This is a multi-part case designed to provide business students with a unique perspective on the many issues that a company must confront and address when an unexpected event disrupts the normal operations of a business. The case is designed to appeal primarily to a broad range of undergraduate students, and to a lesser degree graduate level business students. The case is challenging because it encompasses a wide range of issues, but the focus of the case is designed to entice meaningful and insightful discussion about how to effectively manage a business when confronted by a specific type of disruption. As a result, the case is not complex from the standpoint of developing a "correct" or "incorrect" answer.

CASE SYNOPSIS

Part A of the case is designed to provide students with a multi-faceted situation with the focus being on requiring students to identify, analyze, and prioritize the key issues, their relative importance, and how to address each issue to minimize the impact of the disruption on business continuity and performance levels. Part B complements Part A by providing the student with an in-depth discussion of how the company featured in the case identified, analyzed, and prioritized the key issues they faced during and immediately after hurricane Katrina.

PART A: INTRODUCTION

The risks of, and impacts from, environmental disruptions on businesses are tremendous. As we continue to progress towards an increasingly global marketplace, the risk of a potential business disruption tends to escalate. The ability to manage these disruptions and develop effective continuity response plans in the event of a disruption involves resources, a dedication to planning, and early involvement of key participants (Zsidisin, Melnyk, & Ragatz, 2005). Risk management has placed many professionals in an unfamiliar and relatively new territory, forcing the application of new techniques (Elkins, Handfield, Blackhurst, & Craighead, 2005) and highlighting the need for improved visibility and communication (Christopher & Lee, 2004).

Given the large potential impact on business from a disruption, interest in, and application of risk management tools is expanding. One of the many challenges for businesses today is to plan, control, and monitor the potential risk associated with uncommon or undesirable business interruptions. Ultimately, to be highly effective in a constantly changing marketplace, a business must have a contingency plan that incorporates the identification and valuation of various risk events, the probability of occurrence, and the firms' contingencies for alternative actions.

Clearly one size does not fit all in the management of potential risk. With a better understanding of the causes, identification, assessment, and management of risk has come the realization that there is no single method of controlling the risk of a disruption. Recent natural disasters such as Hurricane Katrina and the typhoon in the Indian Ocean have highlighted the need for better disaster preparedness planning (Alff, 2006; Hale & Moberg, 2005). Therefore, the remainder of this case focuses on how Alabama Power successfully utilized a contingency planning process in disaster recovery efforts to achieve dramatic and positive results immediately subsequent to Hurricane Katrina.

BACKGROUND

Hurricane Katrina struck the Gulf Coast as an extremely large Category 3 storm on the morning of August 29, 2005. The storm surge from Katrina caused catastrophic damage along the coastlines of Louisiana, Mississippi, and Alabama. In Louisiana, the surge breached several levees separating Lake Pontchartrain from New Orleans, ultimately flooding about 80% of the city. With damages estimated at $75 billion, Katrina was the costliest hurricane in United States history. In addition to the financial devastation, the storm killed 1,417 people, making it the deadliest U.S. hurricane since 1928.

While publicity was heavily focused on the large metropolitan area surrounding New Orleans, the damage went well beyond New Orleans. Record storm surges smashed the entire Mississippi Gulf Coast, peaking at 34 ft in Bay St. Louis, Mississippi and reaching 13 feet as far away as Mobile, Alabama. The extensive storm surge contributed to massive, wide spread damage. The devastation of the storm surge was extensive due in large part to the massive size of the storm plus the fact that a large part of the region is at, or just above, sea-level.

IMPACTS

Over 1.2 million people were under an evacuation order before Katrina hit land on August 29, 2005. Less than a day later, the levee protecting New Orleans began to fail, and within days, residents were forced to evacuate the city, as many roadways became riverways. Similar evacuations took place along the Mississippi and Alabama Gulf Coast regions as well as many inland areas. Ultimately, more than 1.5 million people were displaced, a major crisis on a scale unseen in the U.S. for many years. With $75 billion in damages, Katrina earned the dubious distinction of being the costliest hurricane in US history. Katrina caused almost double the dollar value of destruction when compared to the previously most expensive Hurricane Andrew that blew into the Eastern U.S. and devastated the Carolinas.

Images of damage to a wide area encompassing both major cities and small towns were prevalent immediately after the storm. Unfortunately, the bad news did not end when the storm made landfall along the coast. Months after the storm, pictures continued to show the massive and widespread devastation Katrina left behind. Relief efforts to assist people remained in effect for months after Katrina as response teams struggled to overcome the large-scale destruction left by the aftermath of the storm. Coastal areas were the areas hardest hit, however, wind damage, heavy rain, and large-scale flooding were all reported hundreds of miles inland. Along the Gulf Coast, wind gusts were clocked in excess of 115 mph in Pascagoula, MS and over 100 mph on Dauphin Island, AL. Farther inland, Mississippi experienced wind gusts of 100 mph and higher as far north as Hattiesburg. In Alabama, wind gusts topped 50 mph as far north as Birmingham.

Federal disaster declarations blanketed 90,000 square miles of the United States, an area almost as large as the United Kingdom. The hurricane left an estimated three million people without electric power, not only severely hampering rescue efforts but hindering their ability to function. Soon after the storm ravaged the coast, Homeland Security Secretary Michael Chertoff described the aftermath of Hurricane Katrina as "probably the worst catastrophe, or set of catastrophes" in the country's history!

Katrina's economic impacts may be more lasting and far reaching than typical natural disasters due to the severity of damage and the unique geography of the region affected. By blasting New Orleans, the storm hit a vital organ of the U.S. economy--a concentration of ports, rail lines, barge traffic and major highways making up one of the nation's major trade hubs.

While it is still too soon to determine the exact long-term business impacts of Hurricane Katrina short-term impacts have already been tremendous. In the six months immediately after Hurricane Katrina struck, the US Small Business Administration approved $5.2 billion in disaster loans to over 73,000 homeowners, renters, and small businesses in Texas, Louisiana, Mississippi, Alabama, and Florida (DHS, 2006). While all business areas in the region were affected, several key industries and infrastructures were considered particularly vital due in large part to the ripple effect felt throughout the entire U.S. economy.

INFRASTRUCTURE AND INDUSTRY DAMAGE

Hurricane Katrina along with previous damage caused by Hurricane Rita impacted over twenty ports in the Gulf of Mexico. The impact of the hurricanes varied, with the largest impact being on the ports of Louisiana, Texas, Alabama and Mississippi. For several ports, including New Orleans, the impacts were considerable; some of the facilities were damaged beyond repair while others required extensive re-building efforts before they would again be suitable for commercial use. Maritime trade drives, or contributes to, many important facets of many U.S. industries, causing a tremendous ripple effect throughout the economy. U.S. ports and waterways handle over 2 billion tons of cargo annually with much of that commerce flowing through Louisiana, Texas, Alabama and Mississippi.

Along with the port infrastructure damage, Katrina also interrupted oil production, slowed the import of crude oil, and limited refining capacity in the Gulf area, thus having a major effect on fuel prices. One tenth of all crude oil consumed in the United States and almost half of the gasoline produced in the country comes from refineries in the southern states located along the shores of the Gulf. In addition to having a major impact on crude oil, 24 % of the entire U.S. natural gas supply is extracted from, or imported to, the affected region. The initial disruption to the energy infrastructure was astounding as 91% of offshore crude oil production was temporarily lost and 83% of daily gasoline production capacity temporarily extinguished (Anonymous, 2005).

Katrina also had a significant effect on agriculture. Winds from Katrina affected significant percentages of the corn, rice, soybean, fruits, vegetables and nursery crops in the effected region with expected losses estimated to be around $190 million. Livestock losses were sizable in the poultry and dairy industries with dairies in the affected areas reported losses exceeding $3 million per week. Early estimates from the Forest Service also point to sizable timber losses from Hurricane Katrina that will amount to 4.2 billion cubic feet of timber and possibly billions of dollars worth of assets destroyed.

Port infrastructure damage had a dramatic effect on our nation's petroleum, grain and farm products industries, as well as our, fruit, poultry, coffee bean, chemical and steel trades. For example, the Port of New Orleans, which was non-functional immediately after Katrina, typically serves as a focal point for cargo to 28 states, supporting nearly $37 billion in economic benefits. As ports in the Gulf coast region were damaged, the impact was felt globally. Not only was the U.S. economy impacted, but with over half of the grain exports for the U.S. departing from ports directly impacted by Katrina, foreign markets counting on U.S. grain to feed their citizens also suffered severe negative impacts.

ALABAMA POWER RESTORATION CHALLENGES

Alabama Power is the second largest subsidiary of Southern Company, the nation's largest generator of electricity. Alabama Power, an investor-owned, tax-paying utility, serves 1.3 million homes, businesses and industries in the southern two-thirds of Alabama. More than 78,000 miles of power lines carry electricity to customers throughout 44,500 square miles.

Alabama Power's peak outage occurred at 6:30 a.m. on Tuesday, August 30, 2005, about 24 hours after Katrina's initial landfall. As Katrina barreled up the Alabama-Mississippi border, it left 636,891 Alabama Power Company customers in the dark. Nearly half of the company's total customers were without power during the immediate aftermath of the storm. By sheer outage numbers, this storm was the second-largest in the company's history, behind September 2004's Hurricane Ivan (825,000 customer outages).

According to Alabama Power statistics, 1,914 miles of power transmission lines were out of service, roughly 15% of the total line length maintained by the company. The transmission lines are vital to the power distribution infrastructure since they are responsible for transferring power from the generating plants to substations throughout Alabama Power's service area. In addition, the company was facing 940 transformers that were damaged, 1,376 poles that needed to be replaced, and 384 miles of distribution power lines that were out of service. These distribution lines provide the basic infrastructure that allows for service to homes and businesses. Without this infrastructure, the management at Alabama Power is facing a monumental challenge!

CASE DISCUSSION QUESTIONS (PART A)

Recent natural disasters such as Hurricane Katrina have highlighted the need for better disaster preparedness planning. As a result, address the following five issues.

1) What actions can an organization take to prepare for potential disruption?

2) How do seemingly local, or regional, events impact the larger supply chain network (or even the entire economy) as a whole?

3) Discuss why you think some companies are able to react quickly to disastrous situations when others cannot. What are the key differences between those companies who can react quickly and effectively to a situation and those that can not?

4) Given the enormous task ahead and the limited information available, provide thoughts on how to approach a recovery plan. This should include a prioritized list of key accomplishments for restoring power, as well as a list of company needs required to accomplish the restoration.

5) Discuss how the company's dedication to quality and their philosophy of continuous process improvement could be utilized upon completion of the response to Katrina to enhance future efforts.

PART B: THE ALABAMA POWER RESTORATION PROCESS: ANSWERING THE CHALLENGES

According to Senior Vice President of Power Delivery Mr. Robin Hurst, "the key to managing a crisis is not waiting until the crisis occurs to begin planning." Alabama Power has practiced this philosophy of actively planning for a crisis well before the crisis begins. The results have been dramatic. For example, while there were longer-term repairs that needed to be made to the infrastructure after Katrina, the company accomplished an amazing feat--they restored power to all of their customers in an impressive eight days. In spite of severe electrical and general infrastructure damage and destruction from Hurricane Katrina, over 600,000 customers had power re-established within a week! Furthermore, many of those customers only experienced outages for a few hours to a couple of days.

Alabama Power has been dealing with these types of situations for many years. In 1979, Hurricane Fredric caused 239,400 Alabama Power customers to lose power and, given the severity of the storm, it took the company a respectable 21 days to fully restore power. Roughly twenty-five years later and based on the results achieved immediately after Katrina, it appears their dedication to continuous process improvement has continued to pay dividends to the company and its customers. It is clear that continually identifying disruption areas, training and equipping personnel,

and updating the disaster response plan certainly makes a difference in business and in the lives of people.

Successful crisis planning requires dedication to continuous development and refinement of the contingency plan at both the organizational and employee levels. Properly developed, the plan should be designed to address the crisis and should always provide details for timely and complete responses to both specific and general risks. A well-prepared plan must also take into account the lessons and experiences learned in previous events. Unfortunately, like many management plans, this is much more easily said than done. Nevertheless, if properly executed, the proactive process of business continuity planning, contingency planning, or disaster planning provides the foundation for reaction once an event occurs. This special type of planning provides a blueprint for responding to the risks associated with an unknown event.

How is it possible to provide a blueprint for responding to an event that is unknown? Clearly, it is impossible to accurately predict every future unknown event. Managing a crisis often includes handling disruptions to normal operations caused by unplanned events. Through the benefit of experience, research intelligence, hard work, continuous refinement and updating of the plan with current information, and a little luck, these efforts can lead a company to success in continuing their operations in the face of adversity. In the case of Hurricane Katrina, a geographically widespread natural disaster, Alabama Power found success by employing their crisis recovery plan.

AWARENESS--DEVELOPING THE PLAN

The risk of a disruption is very real and can cause severe consequences. Therefore, creating awareness of risks to the business is a vital first step to successful continuity planning. Included in this first step for Alabama Power was identifying the purpose for the crisis plan. Alabama Power made it clear that the primary purpose for its disaster plan was to reduce customer outage time to an absolute minimum within the guidelines of safe, practical and orderly practices. The purpose provided planners with a solid foundation for all future planning, management, and operational efforts in the event of a crisis. The purpose serves as the basis for strategy development in a crisis as well as affecting plan implementation processes.

Due to the nature of their business, and the geographical location, Alabama Power has developed extensive experience in dealing with disasters of all sorts, ranging from hurricanes to ice storms. One important lesson they have learned was that in order to meet the stated purpose of their disaster plan, they must move, or be prepared to move, the necessary personnel, equipment, and logistical support to the affected areas as soon as it is safe to do so. In order to do so takes a well organized, prepared team of professionals who are familiar with the requirements and resources at hand.

A critical step in developing any plan is determining the assignment of responsibility and outlining how the organization will be organized to best manage the situation. To borrow from military logistics expertise and terminology, the plan must outline the 'Chain of Command' and delineate who does what, when, and where. While never perfect, the basic organizational plan provides an excellent starting point and aims to reduce vast amounts of confusion early in the management of a crisis. The plan also allows personnel to be trained to meet specified, well-defined requirements that are assigned to each position on the crisis management staff. The plan and key managerial personnel are then responsible for informing the company of exactly what the personnel requirements will be in the event that the organization's disaster plan is activated. Once the organizational structure is defined and personnel/skill requirements are determined, basic functions can be published, dictating the responsibilities of each individual position. By doing so, the plan helps to alleviate confusion during the event and supports training of personnel.

PREVENTION--THE WINDS OF CHANGE

With the organizational structure of the disaster team in place, the positions identified, and personnel selected to fill the positions, it's time to review and prepare for mobilization. The plan provides guidance and responsibilities, but it is ultimately up to the people involved to be familiar with what and how they will fill their roles when called upon. Simply put, it is not enough merely to be aware of potential problems and to plan; managers and personnel have to be familiar with the plan and take action when necessary.

Once the plan is written and the people are trained and familiar with it, what is the next step in a successful disaster response? The organization must have the tools in place to support the personnel charged with key responsibilities. This ranges from designating a facility, or facilities, that will serve as the operations center(s) to incorporating communication systems, to providing technology that will assist in providing advanced warning when possible. Alabama Power utilized its day-to-day control centers as part of its contingency plan. The Alabama Control Center (central point of contact for power transmission), the Distribution Operation Center (Regional Control Centers in Birmingham, Montgomery, and Mobile charged with responsibility for monitoring power distribution), and the Customer Service Center (central customer service centers in Birmingham and Montgomery) were all vital to the success of Alabama Power's disaster response plan. In a situation like Hurricane Katrina where a major disruption is expected to impact multiple regions, the corporate office provides the central role in the disaster recovery plan. In these cases, the Corporate Storm Center in Birmingham, Alabama is also manned as part of the disaster response plan. This facility provides a central point of contact when regional facilities require additional restoration support or when restoration assistance outside Alabama Power's service territory are requested.

Oftentimes certain situations pose obvious threats to business operations and can be proactively addressed. Preventive action, where feasible, enables the company to 'head-off potential problems before they are problems. The intent is to understand potential weaknesses and to take action. This step not only prevents some potential disruptions, it also helps the organization deal with other situations as they arise.

Now the stage is set, the plan is up to date, the personnel are trained, and the facilities have been identified and equipped. In late August 2005, the decision was made to activate the Alabama Power Emergency Operating Procedures. Preliminary analysis was conducted to determine the most likely impact areas and the professionals within each division of Alabama Power began work on making the plan operational. In preparation for the storm, five specific focus items were developed. This short list of focus areas or key priorities was developed with the primary goal of minimizing customer outage times in mind. The five key areas were identified based in large part on lessons learned from previous storms. As part of their commitment to excellence, management at Alabama Power has a continuous improvement process to aid in effective disaster planning. The result of the continuous improvement process was the identification of five key areas to address through the implementation of the disaster recovery plan.

First, staging areas for incoming personnel and supplies were identified. This process enables the flow of material in an organized fashion. It also makes the job of storing and moving required supplies and equipment more efficient. Next, decisions had to be made on the division of labor and prioritization of areas of control. There are only so many resources available to the company and important decisions have to be made concerning where those resources will be focused first for maximum value. Third, resources necessary to support each staging area were identified. This allowed for early supply movement and pre-staging decisions to be made and adjusted as the storm approached. Fourth, Alabama Power contracted with a third-party logistics company just in case additional resources were required to fully implement the disaster recovery plan. The contractor provided temporary eating, sleeping, and restroom facilities at designated staging areas. Finally, the plans for use of company facilities as back-up operating locations and refuge shelters was reviewed and finalized. The key decision to commit resources to logistics/ supply chain related areas and to relocating critical resources became crucially important in the days immediately following the storm.

REMEDIATION--IMPLEMENTING THE PLAN

Even if the company has taken the necessary steps to increase disruption awareness and has taken action to anticipate and prevent problems before they can occur, supply disruptions cannot be completely eliminated, especially in crisis situations. With this assumption, the company relies on its plan for quick action to fix problems when they occur. The plan provides a blue print for appropriate actions and allows trained, knowledgeable personnel to take immediate action.

In our case, Alabama Power faced a tremendous task. As discussed, over 600,000 customers were without power; 1,376 poles needed replacing, 940 power transformers were damaged, and close to 2,000 miles of power lines had to be restored. Efforts to restore power had to begin as soon as possible. Due to continuous planning conducted by the company, trained personnel went into action immediately. They utilized the disaster response plan, the resources of the organization, and the technology available to tackle the many problems facing the company.

Communication is vital to successful coordination of the disaster response plan and the Katrina response was no exception. Communication is required to effectively establish the priority of repair, schedule proper distribution of supplies and resources, and help to ensure safety of workers and customers. Previously coordinated support from SouthernLINC Wireless provided communications between field employees and various operation centers as well as many public safety departments. This enabled Alabama Power to begin its survey and repair efforts immediately after the storm had passed.

Several logistical issues also had to be addressed if the primary goal of the disaster recovery plan was to be met. During the peak period of restoration efforts in Alabama and Mississippi, the Alabama Power Company managed or assisted in managing 20 staging areas in Alabama and Mississippi. Overall, the company processed 200 trucks loads of material and coordinated 100 buses and numerous personnel support vehicles. In addition, the company managed 40 refueling sites managed by 80 employees dispensing 306,529 gallons of fuel. In direct support of personnel, the company coordinated service and provision for 74,088 breakfasts, 82,198 lunches, 75,617 dinners, and 3.36 million pounds of ice. In this type of contingency, many items that are taken for granted become an issue. Alabama Power also coordinated service for over 25,000 pounds of laundry, 60 dumpsters, 12 office trailers, and 350 port-o-lets. The combination of a business continuity plan, well defined tactical processes, sufficient levels of pre-planned logistical support, and the effective utilization of qualified personnel led to total restoration of power in only eight days, a truly remarkable feat.

KNOWLEDGE MANAGEMENT--CONTINUOUS PROCESS IMPROVEMENT

The last big piece of the planning puzzle is knowledge management. When disruptions occur, it is very important that organizations learn from the experience--from both positive and negative aspects. This sounds easy enough. While sometimes this is relatively easily achieved at the individual level, learning at an organizational level takes a special effort. This is in large part why Alabama Power employs an active continuous process improvement program as part of its management philosophy. This is particularly important when examining the disaster response plan employed by the utility.

During and immediately after the crisis, personnel have been working full steam in preparation and mobilization for the event. During this period, they have serious concerns about their own families, friends, and property. Nevertheless, they serve their company and its customers in a professional manner, responding to the crisis. Now, immediately after working countless hours in adverse conditions, sleep deprived professional employees are expected to record detailed success stories and problem areas so the disaster response plan can be enhanced prior to the next event. In order to properly prepare for, and not relive the same situation over and over again, it is vitally important to document both successes and problems as soon as possible after they occur. The fresher the issue and company reactions are in the minds of the employees, the more accurate and thorough the employee recount of the situation is presumed to be. This allows the organization to improve the plan and effectively manage their continuous improvement process through continuous enhancement of their disaster recovery plan. Even if everything goes relatively well, the 'post-mortem' examination is a means of continually enhancing the plan. Ultimately, the continuous planning mindset is essential to long-term success.

Alabama Power continued their planning process improvement efforts throughout and subsequent to Hurricane Katrina. As part of the contingency plan and its requirements for personnel, detailed event logs were kept, both to support restoration effort decision-making processes and to assist in continuous process planning improvement for future crisis events. Reporting experiences from an event are critical, whether the lessons are truly new experiences or just a re-emphasis of the expected, it is important to record, prioritize, report, and address each experience. Lessons learned from Hurricane Katrina included such issues as the need for increased logistics support for personnel and potential vulnerability of communication capabilities. Enhancing the identification of alternate facilities, managing competition for scarce resources, and support of employees with property losses and family crises were also identified as key areas that could be addressed to aid disaster response improvement. As shown above, lessons from such a widespread event are indeed widespread themselves. Since no two crisis situations are the same, new lessons can be learned from each event.

The impact of Hurricane Katrina will have long-term impacts. Many businesses are only now recovering from losses while other businesses will never recover. Natural disasters of this type cause massive business disruptions, regardless of industry. In the case of Alabama Power, the company was able to successfully manage restoration efforts in minimal time. This is due, in large part, to the continuous dedication of the company to contingency planning efforts conducted through implementation of a continuous process improvement philosophy. By focusing their efforts on awareness, prevention, remediation, and knowledge management, Alabama Power was able to recover quickly and efficiently from the mass devastation created by Hurricane Katrina.

CASE DISCUSSION QUESTION (PART B)

1) Given what Alabama Power has experienced (Part A), and how they responded (Part B) identify any additional issues and potential tools that management may be able to use to help them achieve continuous improvement in their contingency planning process.

Joseph B. Skipper, Auburn University

Joe B. Hanna, Auburn University

Brian J. Gibson, Auburn University

AUTHOR BACKGROUND INFORMATION

Joseph B. Skipper is a Doctoral Student in Management in the Dept of Management at the College of Business, Auburn University and a Major in the United States Air Force. Ben has served as a Logistics Officer in the USAF for 13 years holding positions at the tactical, operational, and strategic level. He holds a B.S. degree in Marketing from Troy State University, as well as a M.S. in Logistics Management from the Air Force Institute of Technology. His primary research interests include contingency planning, risk management, and supply chain disruption. He has published in the International Journal of Physical Distribution and Logistics Management and the Journal of Transportation Management.

Joe B. Hanna (PhD. New Mexico State University) currently serves as Departmental Chairperson and Professor of Supply Chain Management in the College of Business at Auburn University. Dr. Hanna has authored or co-authored numerous journal articles appearing in journals such as Journal of Business Logistics, International Journal of Logistics Management, and Journal of Transportation Management. Dr. Hanna has also co-authored a logistics textbook and has participated in government funded transportation research. Joe is also an active member of several professional organizations and regularly conducts professional training seminars for various organizations. Dr. Hanna's area of interest in supply chain management allows him to instruct undergraduate, graduate, and executive education students at Auburn University. Prior to entering academia, Joe gained professional experience working for Phillips Petroleum Company, Phillips 66 Chemical Company, and Coopers and Lybrand.